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Wailing begins about ruling on deepwater leases

Bob Tippee
Editor

"This is a sad day for the American public," wailed Senate Energy Committee Chairman Jeff Bingaman (D-NM) about a court decision favoring an oil company in a royalty case with large implications.

In office at passage of the Deep Water Royalty Relief Act of 1995 (DWRRA), Bingaman claims to know Congress never intended "to allow royalty-free oil regardless of price."

Yet a federal judge in Louisiana has upheld a challenge by Kerr-McGee Oil & Gas Corp., now Anadarko Petroleum Corp., to the Department of Interior's authority to collect royalty on production from eight deepwater leases issued in 1996, 1997, and 2000 (OGJ Online, Nov. 1, 2007).

At issue are oil and gas price thresholds capping royalty relief for production in 200 m or more of water. Interior's Minerals Management Service inserted no such thresholds in leases it issued in 1998 and 1999. Before its merger into Anadarko, Kerr-McGee filed a lawsuit arguing Interior lacked authority under DWRRA to impose thresholds in the other 3 years.

A look at the statute raises questions about the recollections of Bingaman and several other similarly minded lawmakers about congressional intent.

The law discusses price thresholds only with regard to deepwater leases in existence at DWRR enactment. Because Congress didn't want royalty relief for leases granted after enactment to preclude development in deepwater areas already under lease, much of the statute, including all elaboration about price thresholds, addresses new production on existing leases.

For leases issued in the 5 years after enactment, DWRR refers to a general paragraph that says royalty can be suspended for "a period, volume, or value of production" determined by Interior, with suspension subject to variation according to the price of production.

But it adds, "[T]he suspension of royalties shall be set at a volume of not less than" production totals calibrated to water depth.

That this phrase begins with the words "except that," together with silence on price thresholds in language related to leases issued for 5 years after enactment of the law, seems to mean Congress intended for production volumes to be the only limits on royalty relief.

A judge in Louisiana thinks so.

(Online Nov. 2, 2007; author's e-mail: bobt@ogjonline.com)


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